Friday, August 22, 2014

A slight clarification about the "end of labor"

MIT prof and economic policy advisor David Autor has written an excellent new paper about labor market polarization, which you should read. In that paper, he cites an article I wrote for The Atlantic last year, discussing the possibility of "the end of labor." Mr. Autor makes it sound as if I believe the "end of labor" is coming, but in fact, I only think this is one possibility among many. The point of my article - which was inspired by this Larry Summers talk - was that the "end of labor" is something we should prepare to deal with, even if there is only a low probability of it happening. The mechanism for the "end of labor", of course, could be such a huge degree of skills-based labor market polarization that even small labor market frictions would be capable of creating huge amounts of equilibrium unemployment; alternatively, it could be a continuation of the trend of increasing capital share of income, as discussed in this paper.

The Atlantic, of course, got to pick the title of my piece (as all magazines do with all pieces), and understandably went with something attention-catching rather than something that would reflect the uncertainty I tried to express in the article itself.

Two economists were walking down the street one day when they passed two large piles of dog shit. The first economist said to the other, "I'll pay you $20,000 to eat one of those piles of shit." The second one agrees and chooses one of the piles and eats it. The first economist pays him his $20,000.

Then the second economist says, "I'll pay you $20,000 to eat the other pile of shit." The first one says okay, and eats the shit. The second economist pays him the $20,000.

They resume walking down the street.

After a while, the second economist says, "You know, I don't feel very good. We both have the same amount of money as when we started. The only difference is we've both eaten shit."

The first economist says: "Ah, but you're ignoring the fact that we've added $40,000 to the country's GDP!"

Two economists are advising central banks. One is advising America's Federal Reserve Bank and recommend QE, the other is advising the European Central Bank and doesn't. America is doing better than Europe some of which is suffering from Great Depression-like conditions and worse and hence is more likely to see the "end of labor."

Autor, it seems, is referring to over say the next 20-30 years, but what about 50 years from now? 100? More. With the way things look, there could be little left for humans in material production/service that robots/computers can't do cheaper than minimum wage, And what's left may require a very high degree of human intelligence and education.

Like in your article, my initial thought was to try to own robots by owning a highly-diversified stock market portfolio. Buy shares in the Vanguard Total Stock Market Index Fund. But you know, still mulling this over for sure, but if the robots/computers get really cheap and capable, how much redistribution will it take for everyone to live well materially (positional externalites are of course another big story). Today, the rich are still paying about 15-35% in taxes, depending on how you define rich. With this kind of massive robot/computer production, robots building robots really fast, that would be way more than enough. Maybe 1% in redistribution would even be enough.

But a big question is what about the transition period to completely super robots/computers that just produce so much that even 1% redistribution lets everyone live like $100k+/household. That transition period might create severe poverty and unemployment for the majority, who can't do anything that pays above minimum wage, that robots/computers can't. The number of jobs to complement the highly skilled and the robots may get to be just a small percentage of the population which doesn't have those skills (see my post at Carola Binder's).

Next, what if ultra robots/computers do get cheap, but there are rare, needed raw materials? Still, a sizable percentage of a total stock market index is raw materials, so this still seems like a good hedge. But still a relatively small number of shares might not be nearly enough to avoid poverty.

And here's something very interesting:

You write in the Atlantic, "In a world where capital earns most of the income,…" But what about a world where superstars earn most – or the vast majority of – the income?

Here's from a recent article in Foreign Affairs by Erik Brynjolfsson, Andrew McAfee, and Michael Spence:

"Digital technologies increasingly make both ordinary labor and ordinary capital commodities, and so a greater share of the rewards from ideas will go to the creators, innovators, and entrepreneurs. People with ideas, not workers or investors, will be the scarcest resource…

Skill-based technical change, for example, plays to the advantage of more skilled workers relative to less skilled ones, and capital-based technical change favors capital relative to labor. Both of those types of technical change have been important in the past, but increasingly, a third type -- what we call superstar-based technical change -- is upending the global economy."

I mean, just as a thought experiment, what if ultra-robots do get to the point where you could produce one for just $200, with the help of other ultra-robots and computers. But, you can't produce one without paying tolls to various superstars who hold patents, or have secret software and techniques. As monopolists, these superstars might severely restrict supply and drive up the price, out of the reach of the majority. Of course, patents expire, eventually. But now plutocrats are pushing for life plus 100 years for copyrights!

Scenario 1) Robots/Computers just get ultra-cheap – ultra robots/computers building ultra-robots/computers. And, it is assumed that raw materials are not hard to come by, and recycle very quickly. So, total societal wealth just absolutely explodes, and no one can charge giant tolls, and restrict supply, for their rare bottleneck raw materials.

Here, the pie is just so gigantic, even tax rates of just a few percent on the rich, the superstars, would allow everyone else to live well materially (Of course, many of today's rapacious billionaires would fight a tax of even 1%. And, positional externalities are still, of course, a big issue.)

In this scenario, you could even imagine ultra-computers replacing superstars, by and large.

But, a huge problem is, on the way there, the interim period could create massive unemployment and below market wages, yet not a pie big enough that the current about 15-40% taxation is enough to take care of the lower skilled. Or lower-market-demand skilled. I'd like a better term, because a lot of these people have a lot of skill, just not academic, or high paying. We recently had some remodeling, and these people were very skilled and knowledgeable, but the career is not high paying. Handymen often have lots of knowledge and skill, but no health insurance, and not a very high wage.

But these are the term in use.

So, suppose robots take over 90% of the unskilled/low-skilled jobs, the fast food workers, the UPS delivery people, the maids. What jobs will those 90% then get?

Here's the traditional economics answer: Their wage will drop until their supply of labor once again equals the demand for their labor. As I remember once hearing Rush Limbaugh say, (paraphrasing) There's no need for unemployment without the minimum wage; anyone can be my peon for one cent per hour.

Now, aside from the fact that death is preferable to being Rush Limbaugh's peon, there is the minimum wage, but even if there is not, the market wage could drop below the level necessary to stay alive for very long. And this could easily happen if the choice is between you and a robot which can do the job for the equivalent of pennies per hour.

So, what jobs could the unskilled get, aside from being peons for Rush Limbaugh? You have to consider the production process and societies demands, including price-elasticity (or inelasticity) of demand.

The rich might like having a human personal trainer with a good personality, but even if the price drops to one penny per hour, having more than one or two is not something that would be particularly desired, and it would be for just maybe 10 hours/week, from the minority that are wealthy. This is price inelasticity of demand, something Brynjolfssen and McAfee talk about in The Second Machine Age. And it constrains demand to an extent from matching an increased supply of available unskilled workers.

But for most production, by and large, I think it is similar to the L-shaped production function. Eventually you run out of productive things the unskilled can do without more productive facilities, and the skilled people necessary to build and run them. And the supply of available unskilled workers could increase tremendously as robots take over fast food, package delivery, housekeeping,…And, more and more, US unskilled workers will have to compete with Chinese and Indian and African, as telecommunication and remote control improve greatly.

All these newly unemployed cannot just get jobs as personal trainers. Housekeepers? Robots might do this 90% over the next generation – Imagine a Roomba with the size and power of a regular vacuum that plugs itself in and manages its cord. Waiters? You're going to see some very fast, and cheap, and right on top of everything, and tireless, robots doing that. Hair stylists? Inelasticity of demand, and even there, eventually robots – And once a robot gets it right it can be much more consistent than a human hair dresser.

I had an email conversation with Timothy Taylor, and he thought perhaps some kind of flexible-intelligence intermediary/manager/coordinator of all of the computers and robots. And he noted how many of the unskilled have mastered their smartphones a lot better than he has. And Autor seems to point to this to a large extent, here:

But I'm not at all so confident. Honestly, it's not that hard to master a smart phone. I'm not sure how many jobs there will be doing this kind of interfacing with, and coordinating of, super robots and computers. We will need to have a huge number of such jobs, and the number of such jobs we can get requires a commensurately large number of super robots, computers, facilities – and the big bottleneck – skilled and highly skilled humans. Again, my guest post at Carola Binder's with the L-shaped production function.

Moreover, we need not just a large enough number of such jobs for American unskilled workers. They will also be more and more competing with workers in Asia, India, and Africa. The reason is, if they are interfacing and coordinating and managing these robots and computers, that's a lot like playing a video game. You sit in front of screens, with camera feeds, readouts, and controls, and monitor and manage these things. And these screens and controls are going to get really good – Have you seen 4k monitors, let alone next generation's virtual reality? Well, you can do that as easily from screens in India as from screens in the American factory or office.

For me it's hard to see, due to bottlenecks in the L-ish shaped production function, how you create enough demand for the unskilled, so that most of them would not have to accept less than minimum wage to have a job.It looks to me like Tinbergen, Goldin, and Katz say; inequality is, and has been, a race between education and technology (See The Second Machine Age, pages 208-10.) Were just going to need a lot more skilled if were going to employ at above the minimum wage all of the unskilled. And if the right continues their dominance, or ability to stop, we're going to continue to grossly underinvest in this (and human development in general, especially Heckman-style), and the costs will be a lot more profound even than they have been over the last generation.

I think we need to involve some computer science experts and engineers in this conversation.

Most of what I hear on this topic is from people like David Autor, Tyler Cowen, and other economists or business researchers (of course, that's most likely because I read economics blogs and newspapers...).

What have the tech gurus said on the topic of when and how robots will take over and what the role of humans will be?

Just look one hundred years back. Great factories in the center of cities are now empty or flipped into modern leisure areas. Where thousands of people were digging one century ago, now work 10 professionals riding big digging machines. Where one people had to manually answer all the letters now automatic spambot just immediately deals with any request, even in various languages.

I have read McAfee's book and I believe that his analogy to Moore's law is appropriate. With the current trend, services will be handled over to the robots fast enough. Of course, McAfee very clearly states that there is still enough of jobs in other branches of industry - especially in infrastructure upkeep and construction, which represents one of the biggest challenges. The problem is obviously with the wages. Low wages go down and less people is needed, which creates big pressure that would eventually burst into a violence. This is something we will be dealing with in the next couple of years, or decades.